Essays on lnsider lnvestment Horizon and lts Role in Information Asymmetry

Abstract

In the presence of information asymmetry between insiders and outside investors, outside investors use the insider investment horizon (HOR). This is a crucial trade characteristic to understand the insiders’ trade motives. However, the application of the HOR to analyze the insiders’ trading activities and their impact on the market participants is relatively unexplored. This thesis employs the HOR to examine the insiders’ profitability and the impact of insiders’ trading activities on the market participants. The four studies in this thesis analyze Swedish insiders’ trading data from January 2000 to April 2021. To examine the outside investors’ response to insiders’ trading activities, the thesis uses the Euroclear Sweden database, which contains stock-holding records for all investors trading in Sweden. The findings reveal that the trading activities of short-horizon insiders, whose trades are more aligned with round-trip transactions, are informative and influence the perceptions of market participants. In terms of abnormal returns, the trades of short-horizon insiders consistently outperform the trades of their long-horizon counterparts in their own firm stocks. As a result, outside investors, the informationally disadvantaged group, do not prefer short-horizon insiders’ presence in the firm. Hence, they reduce investment in their personal portfolios in the stocks of firms dominated by short-horizon insiders. This thesis also finds that the Market Abuse Regulation adopted in Sweden reduces the long-horizon insiders’ profitability more than that of the short-horizon insiders. These findings imply that trades by short-horizon insiders encourage market participants to demand higher premiums or reduce the supply of funds, potentially leading to liquidity problems in the market. Such liquidity problems can adversely affect individual market participants, particularly liquidity traders, while also increasing the cost of financing, ultimately diminishing the value of the firms dominated by short-horizon insiders. The thesis recommends that regulatory authorities consider HOR when formulating regulations to ensure that they equally address the trading behavior of all insiders.